New York Markets After Hours

Treasury prices edge up after 3-year note auction

NEW YORK (MarketWatch) — Treasury prices climbed Tuesday, holding higher after an auction of 3-year notes to notch their third day of gains in four sessions.

The 10-year note
US:10_YEAR
yield, which falls as prices rise, was down 1.5 basis points at 2.945%. The 30-year bond
US:30_YEAR
yield edged down a basis point to 3.889%, and the 5-year note
US:5_YEAR
yield slipped 1.5 basis points to 1.681%.

The 3-year note
US:3_YEAR
yielded 0.757% on Tuesday after a sale of $30 billion of the securities. The notes sold at a high yield of 0.799%, slightly higher than where the broader market was trading at the time.

Bidders offered to buy 3.25 times the amount of debt for sale, compared with a recent average of 3.32 times during the past six auctions.

Direct bidders, which include domestic asset managers, were the strongest bidders, taking down 22.6% of the sale, compared with the recent average of 16.4%. Indirect bidders, which include foreign central banks, bought 28% of the debt, compared with a recent average of 36%.

“Indirect bidders are somewhat below average but the direct bid was really strong,” said Anthony Valeri, fixed-income investment strategist at LPL Financial. “You see that and it’s a sign of domestic demand.”

The front end of the yield curve has sold off in the wake of a Federal Reserve decision to begin scaling back the pace of its bond-buying stimulus program, as investors shift expectations for when the central bank could hike its key policy rate.

Nonetheless, the difference in yield between shorter maturities and longer maturities remains high, suggesting that investors are better compensated for buying longer-dated maturities. For example, 5-year notes yielded roughly 93 basis points more than 3-year notes on Tuesday, according to Tradeweb data.

“I think it’s important for people to focus on the fact that the yield curve is really steep,” said Mark Cernicky, managing director at Principal Global Fixed Income. “There’s a real cost to move to the front end. The steep yield curve suggests that some duration is warranted in the portfolio.”

As the Fed shifts policies, some have urged caution with regards to how the central bank winds down its stimulus program. Eric Rosengren, president of the Boston Federal Reserve Bank, said in a speech Tuesday that the Fed should gradually pare its bond-buying program.

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“This recovery has already been too slow, and we do not want premature tightening of monetary policy to delay the return to more normal economic conditions,” he said. Rosengren dissented in the decision to wind down the bond-purchase program in December.

The Fed said last month that it would reduce its $85 billion in monthly bond purchases by $10 billion, beginning in January, while committing to keeping its policy rate near zero until the unemployment rate falls well below 6.5%.

Data on Tuesday showed that the trade deficit plummeted by nearly 13% to $34.3 billion in November. That beat the forecasts of MarketWatch-polled economists, who projected a deficit of $40 billion, suggesting faster-than-expected economic growth in the fourth quarter.

The Treasury Department will also sell $21 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday. The Federal Open Market Committee will release the minutes of its December meeting on Wednesday, and a nonfarm payrolls report is due out Friday.

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